Are you infatuated by the recent gains logged by AMC Entertainment Holdings (AMC -6.58%)? I get it. A 400% run-up in one month's time is nothing short of incredible for shares of the movie theater chain.
Might I be a voice of reason, however? This stock was already pushing its valuation limits last week, before the renewed effort at Reddit to buoy this meme stock again. The recent rise carries the stock's price well beyond any semblance of sanity.
That's not to say it hasn't paid off for at least some people, because it clearly has. That's also not to suggest AMC shares can't move even higher, because they might. It's simply to say the company's results may never actually justify the stock's present price. That's going to be a problem sooner or later.
From uncomfortable to incomprehensible
Sure, I'm the wet blanket trying to douse the rally by talking about ancient concepts like earnings and value. None of that matters anymore, right? These days, it's all about the premise and the strategic trading angle. In the case of AMC, a band of retail investors -- the proverbial little guys -- spotted a vulnerability hedge funds created for themselves. Namely, these institutional investors overzealously bet against AMC Entertainment by selling too many shares of the stock short, forcing them to buy them back at sky-high prices back in January; you've likely heard it described as a short squeeze. Now this horde of highly focused small-time traders are using the same strategy they employed a little more than four months ago, coordinating the timing of their buying effort to spike the stock's price, again. And it worked, again.
There's a gaping flaw in the crowd's line of thinking, however. That is, a stock's new price resulting from a short squeeze can only be sustained if the underlying company can justify that price. AMC Entertainment can't. Not now. Not in the foreseeable future. And probably not in the distant future.
That's not an arbitrary argument, nor is it based on results that looked awful merely due to pandemic-prompted shutdowns of movie theaters. AMC is outrageously expensive compared to its best-ever fiscal metrics.
On the profit front, 2016's full net income of $111.7 million marks the company's best-ever bottom line; it was edging lower from 2017 on, well before the COVID-19 pandemic materialized. Although EBITDA has continued to grow, operating cash flow stagnated as the company was forced to spend more and take on more debt to grow its top line. AMC's present market cap around $25 billion is a stunning 225 times the company's best-ever net profit.
For perspective, the S&P 500's average trailing-12-month price-to-earnings ratio recently stood at 37, while its forward-looking earnings multiple was a much more reasonable 22.5.
The stock's present price isn't much more palatable compared to revenue, either. AMC's biggest full-year top line took shape in 2019, with a top-line tally of $5.47 billion. Compared to the aforementioned capitalization of $25 billion, that translates into a price-to-sales comparison of 4.6, versus the S&P 500's figure of 3.1, which is well above the norm of around 2.5.
And again, those are "best of" valuations that don't take into account any permanent damage the coronavirus pandemic may have done to the theatrical film business by driving consumers to a wide array of streaming options.
Perhaps the most egregious price concern, however, stems from the analyst community's view of the stock. Based on sales and earnings the company could plausibly produce in the foreseeable future, analysts contend AMC shares are worth something closer to $5 per share. The stock's trading about 10 times that price right now.
Won't get fooled again
These value-based worries are undoubtedly being introduced at a time when most investors don't care to hear them. Their big bets are paying off, with seemingly no end to the gains in sight. As I said, I get it.
Make no mistake, though. The current advance isn't the remainder of any unfinished business from January's short squeeze.
Think about it. In January the stock's short interest was unusually high, and the film industry's prospective recovery could have at least restored most of AMC shares' fundamental value. At January's peak price, AMC Entertainment's market cap was on the order of $5 billion. The stock's price was fair, given the degree of risk it imposed. At five times that market cap now, though -- with short interest accounting for only about a fifth of the stock's total float -- at a time when the film entertainment business appears forever changed by more at-home options.
The same bullish juice just isn't there. This is all hope and hype, which is why it isn't going to end pretty, even if it doesn't end right away.